Germany’s €8 billion MetallRente, the pension fund for workers in the metal and electrical industries, has embarked on a new, revenue-seeking strategy. Ever since it was founded in 2001, MetallRente has prioritised a restricted and conservative strategy focused on guarantees but it has began rolling out a new equity-related product for beneficiaries that allows savers to significantly boost their exposure to capital markets.

MetallRente’s pension offerings comprises a €7.5 billion direct insurance option (MetallDirektversicherung and MetallPensionskasse) that guarantees retirement income with a focus on fixed income products. A much smaller, alternative offering, the €450 million Pensionsfonds allocation, offers exposure to the capital markets but has never attracted huge assets under management amongst Germany’s conservative saver cohort since it was launched in 2003.

Now in a strategy that combines guarantees with risk reward, the €8 billion insurance portfolio includes an equity offering in a bold move managing director Hansjoerg Muellerleile tells Top1000funds.com he has introduced deliberately slowly.

The introduction of the new allocation, outsourced to Allianz Global Investors – sole asset manager for the entire portfolio – has trailed the wider German pension sector. Many other funds raced ahead of MetallRente in a reform process that has seen the sector reduce the level of guarantees on contributions and free up space for higher equity quotas.

MetallRente rolled out its new insurance/equity hybrid model later than others so it could tap all the benefits of a close follower, rather than risk leading the pack.

“We learnt two things from waiting,” explains Muellerleile. “We gained insights into how the market was developing around us, and we grew confident that our customers would want the product because of its low cost and simplicity.”

Muellerleile’s patience has been rewarded by strong demand, evident in the 8,000 jump in new employers (occupational contracts) since the product was offered last April. In Germany, employers choose which product to offer beneficiaries, he explains. “Over the last year, we’ve seen a big appetite for our new, insurance- based contracts that also have risk exposure. It reflects a growing and significant risk appetite amongst our customers.”

The new product offers global, passive, equity exposure of between 30-45 per cent, a ratio that is automatically scaled according to a beneficiary’s age. Meanwhile, scaling up equity risk involves lowering the insurance-based guarantee from 100 to 80 per cent.

“Risk appetite is stronger amongst beneficiaries with a high income. If people are not earning much, and need every cent for their pension, then a guaranteed income in old age is of real value,” he says.

Growing the employer base and assets under management is supporting Muellerleile’s ability to lower costs. MetallRente’s increasing scale means it is better positioned to cut administration and asset management costs paid by beneficiaries, and increase returns.

“We are in a better position to re-negotiate the costs of our contracts by growing the assets under management.”

Enthusiasm for the new hybrid product has also served to highlight lacklustre appetite for MetallRente’s Pensionsfonds allocation, split around 60:40 between risk (comprising equity and corporate bonds) and insurance products. Following an asset liability study last year, a larger element of this portfolio was moved into corporate bonds and fixed-income products after the study revealed the volatility-dampening impact of investing in corporate bonds.

However, Muellerleile says it is difficult integrating sustainability in the corporate bond allocation.

“The data on corporate bonds isn’t always great. But we manged to choose a specific corporate bonds fund that resonates with our sustainability strategy.”

Alongside continuing to attract employers to MetallRente’s new hybrid portfolio, Muellerleile will spend much of 2024 focused on how to tactically adjust the portfolio in response to market volatility. The European Central Bank has signalled it may cut interest rates from June from an all-time high of 4 per cent.

“The ECB is likely to adjust interest rates that will have implications for the portfolio on a tactical level,” he says.

Another focus will be incorporating anticipated changes in the EU’s Taxonomy. Pressure for a faster transition – and bias to other energy sources – is now likely since Europe is no longer drawing on the Russian gas that shaped much of the initial taxonomy.

“When the Taxonomy was first drawn up, Russian gas was plentiful. The Taxonomy will have to evaluate the impact of that,” he concludes.

Recent research by The Conexus Institute identifies significant dispersion in the operating environment for Australia’s superannuation funds. Here they consider the impact on fund investment models including internalisation, private assets and offshore investment teams.

Dispersion is increasing in the operating environment for Australian superannuation funds, with size and flows the most obvious differentiators. This motivates fund-specific investment models, especially in the areas of internalisation, private assets and development of offshore investment teams.

The Conexus Institute’s recently released 2024 edition of its State of Super Research Booklet, provides insights into the state of the Australian super fund sector using data for funds that are regulated by the Australian Prudential Regulation Authority (APRA). In this article we draw out some key insights and consider how they impact fund-specific investment models.

Dynamics of the Australian super industry

There are around 50 super funds with assets exceeding A$1 billion, with the largest at June 2023, AustralianSuper, approaching A$300 billion ($200 billion). The diagram below identifies that the 14 largest funds (the ‘big 14’) manage about 82 per cent of industry assets. There exists sizable dispersion in fund size, and the level of dispersion is only increasing. The market share of the largest super funds continues to increase as the system grows overall, making for some sizeable funds.

Fund flows is another dimension where even greater dispersion is evident. Flows for APRA-regulated funds, which account for contributions, pension payments and member switching (choice-of-fund) activity, netted out at a positive 2.4 per cent of assets in FY2023. Note this captures member-related flows, and does not account for investment income and returns. However, closer examination reveals that only two-thirds of super funds are experiencing positive net flows, meaning that one-third is experiencing outflows.

Below we combine these size and growth numbers into a single chart to create a summary view of the dynamics of the Australian super fund industry. Each dot point represents a super fund, with size appearing on the horizontal axis and net flows on the vertical axis.

The horizontal red line represents the 2.4 per cent average net flow rate. The vertical red line of A$30 billion reflects a number that APRA has used as an indicator of reasonable scale. Below we briefly reflect on each quadrant to explain the situation faced by super funds:

  • Quadrant 1 includes small but fast growing super funds. Our research identifies that often these high growth levels moderate over time, sometimes before these super funds reach good scale.
  • Quadrant 2 is where most super funds would like to be: good scale and experiencing above industry average growth rates. Our research identifies that this quadrant is sticky for some funds but elusive for others, with no funds managing to shift into this quadrant over the last year.
  • Quadrant 3 contains super funds that have good scale but are experiencing a rate of growth below the industry average and in some cases negative. The challenge for these super funds is to successfully develop and implement a growth strategy.
  • Quadrant 4 super funds face the difficult situation of being below scale and experiencing below industry average growth rates. The regulator is likely exploring the sustainability of super funds in this quadrant. Many will be looking to merge with other funds.

Evolution of investment models

Given the disperse dynamics across the Australian super industry, it makes sense that we observe super funds evolving their investment model to one that is appropriate given their situation.

Amongst the largest super funds we are seeing increasingly sophisticated investment activities. Some of the major investment management trends in Australia include internalisation, direct participation in the private asset space, and establishment of offshore investment capabilities. AustralianSuper, for instance, manages over 50 per cent of assets internally and has offices in Beijing, London and New York. Last year Aware Super announced an international expansion of its investment function, the first step of which was the establishment of its London office.

Internalisation of asset management among large super funds is not a new characteristic of the Australian super fund industry. However, the breadth and sophistication of internalised strategies is increasing, as are the size of internal investment teams. Examples of the degree of sophistication include active management of public markets, more direct involvement in private transactions, and greater focus on cash and liquidity management.

The increasing sophistication of private asset activities among many large super funds is notable in this regard, with many of the large super funds having sizable private asset transaction teams, allowing funds to take on deals in a syndicated model (with asset managers and/or other asset owners) or on a standalone basis.

Finally, some of the biggest super funds are establishing large offshore investment teams to support activities in both public and private assets. A broad range of arguments are offered in support for creation of offshore investment teams, including proximity to private asset deal flow, improved ability to analyse and collaborate over private assets and more effective time zones for trading. There are also strong human resource arguments such as access to a larger investment talent pool and increased diversity.

Not all funds are following these trends in investment model evolution for a range of reasons. Some logically flow from the size and scale situations faced by the fund. Others may be more legacy-related.

Scale is a sizable barrier for smaller super funds when considering their investment model, in particular with regard to internalisation and private assets. These areas require an uplift in the sophistication of the investment model and development in a range of areas including investment teams, reporting, risk, compliance, and governance. For many smaller funds, the required uplift in capabilities may prove too costly relative to the potential benefits.

The flows experienced by a super fund can also be an input into a fund’s investment model. It is rational to assume that funds that are experiencing outflows have less capacity to allocate to illiquid assets. However, our research suggests that flows are only one driver. The diagram below comparing super fund allocations to illiquid assets against flow rates reveals there is some relationship, but also much variation around the line of best fit.

Legacy reasons also help explain why some super funds are not evolving their investment models as much as others. One influence is the significant work associated with fund mergers. Flow-on activities from a merger – such as team integration, product consolidation, systems development and investment philosophy and strategy harmonisation – can last years. There can be little opportunity for other initiatives, especially those expanding the scope of investment activities.

Finally, evolving an investment model does not guarantee positive outcomes. Some super fund boards and their chief investment officers may take a more cautious view of the net benefits of implementing a range of activities that entail greater sophistication. There are many risks related to implementation, operational, governance and cultural challenges. For instance, a few large super funds continue to use a substantially outsourced model, including Australian Retirement Trust and Hostplus.

The Conexus Institute is a retirement-focused research think tank philanthropically funded by Conexus Financial, publisher of Top1000funds.com.

David Bell is executive director and Geoff Warren is research fellow at The Conexus Institute.

Roy Swan, director of mission investments at the Ford Foundation, is helping The Church Commissioners for England set up a new impact fund to tackle its slavery legacy. He tells Top1000funds.com about the fund that will provide grants and make impact investments intended to increase access to capital for Black-led businesses.

The Church Commissioners for England, which manages the £10.3 billion assets and properties of the Church of England has established an oversight group to advise the Commissioners on their approach to deploying a landmark £100 million commitment made in response to the Church of England’s sponsorship of the transatlantic chattel slave trade.

The oversight group’s members include leading global experts from a variety of fields, including academic, advocacy, community development, investing, journalism, law, and theology from all over the world.

Roy Swan, director of mission investments at the Ford Foundation, also a member of the group, tells top1000Funds this melting pot filled with a wide range of perspectives and decades of practical knowledge, has begun to collaborate to chart a course of action that will ensure this innovative fund will leave an enduring legacy.

“The focus at this early stage has been providing the Church Commissioners with a clear, impactful, and ambitious strategy to launch the Fund for Healing, Repair and Justice, HRJ,” he says.

The HRJ fund will provide grants to community-oriented NGOs, academic research on the continuing legacy of transatlantic chattel enslavement, and make impact investments intended to increase access to capital to Black-led businesses; all into perpetuity, says Swan.

The oversight group recently released a report containing several recommendations for the fund, which included an assessment that this fund, while a historic gesture, is just a start

“The Church Commissioners should invite others, including Christian institutions and other moral authorities, those with blood on their hands and those who are inspired by noble action, to join this worthy effort,” he says.

The Church Commissioners warmly received the oversight group’s recommendations which Swan calls “encouraging,” adding:  “I know from experience that the best impact investing strategies take time to design based on rigorous, meticulous, and wide-ranging analysis.  I look forward to helping the Commissioners on the journey from plan to execution.”

 Much like the impact investing endowment he manages at the Ford Foundation, the HRJ fund is intended to be perpetual. That means it must generate a financial return of its spending plus inflation over time.

“That is a higher financial hurdle rate than other funds. But as we’ve seen at Ford, aligning an investment strategy within those parameters can not only be done, it can be done well.”

Achieving market-rate returns through impact investing is harder than with traditional investing, but Swan says that’s a challenge the team have embraced.

“Just like with traditional investing, impact investing requires a great deal of diligence and rigorous analysis. At the Ford Foundation, we’re very pleased with the returns we’ve achieved in our Mission Investments program, which is why we believe that others can also achieve success.”

Over the portfolio’s first five years, Ford’s impact investing endowment generated a 28 per cent compound annual return.

“We see the Ford Foundation impact investing strategy as a case study for other endowments and institutional investors on how to take advantage of unconventional approaches to generate conventional market-rate financial returns together with meaningful and measurable positive social impact.”

“The Church of England has made a significant, and symbolic step in the right direction with the Fund for Healing, Repair and Justice.  I have no doubt that this fund will provide a template for others because of its inspirational and aspirational objectives.  Although impact investing is harder than traditional investing, the returns are also more robust– financial and social– and lead us to a brighter and more prosperous future. That’s hard work worth doing,” he concludes.

A clear focus on and commitment to diversity, equity and inclusion (DEI) is helping the $480 billion CalPERS support its senior staff and managers to optimise the performance of the teams it already has, as well as providing a valuable framework for attracting and recruiting a diverse range of new talent. 

When CalPERS chief diversity, equity, and inclusion (DEI) officer Marlene Timberlake D’Adamo presented a DEI activities and accomplishments review to the $480 billion pension fund’s board of administration in January, she could reflect on 18 business plan initiatives, 18 strategic measures and 57 deliverables across the 2022-23 year. 

These were achieved across the fund’s five DEI pillars: culture, talent, health equity, supplier diversity and investment. CalPERS’ DEI roadmap for 2023-24 encompasses 20 business plan initiatives, 21 strategic measures and 95 deliverables. 

It’s a full program, and one on which Timberlake D’Adamo provides regular progress reports. 

“We go to our board, and we provide updates of all the activities that we’re doing, where we think we’re going, where we’d like to go, with the work that we’re doing,” Timberlake D’Adamo says. 

“Our framework is centred on our mission, and our mission is to pay pension and health benefits to members and their beneficiaries. We’re a [$480 billion] pension plan, as well as we have a health program that is very significant. We cover about a million and a half people in terms of health benefits, both active members – so those are members that work for the state and local municipalities – as well as retirees.” 

Timberlake D’Adamo describes her role as “the architect, conductor, quarterback, if you will” of CalPERS’ DEI activities.  

“Our framework has five different pillars that we’ve identified as what are the things that are critical to us being able to deliver on our mission,” she says. 

“What we do during the course the year is, really underneath the framework, different initiatives that are geared toward improving the efforts that we see and the impacts that occur with respect to those five pillars.” 

Among the range of initiatives and deliverables outlined in its Diversity, Equity, and Inclusion Activities and Accomplishments Review, dated January this year, CalPERS said it ran “uncovering unconscious bias in recruiting and interviewing” training, and used an augmented writing tool to reduce biased language in job ads and descriptions, with the aim of attracting candidates from a broader pool of talent. 

Timberlake D’Adamo says CalPERS is interested in “making sure that our leaders are bringing the most positive things that they can to their teams”. 

“I’m thinking about different opportunities for training, say, that we have about inclusive leadership, and thinking about different ways that we actually can help our managers,” she says. 

“A lot of times, as a manager, it’s really hard, because you’ve got a lot of things that you have to do. Sometimes a team member who is asking a lot of questions, or just doesn’t seem to be going along with the program, slows you down.  

“A lot of what we do is…like building a bridge, between the manager, who really is focused on getting the work done and making the results, and the team member who is focused on the same thing but is just seeing it in a different way.” 

Timberlake D’Adamo says CalPERS creates opportunities both formal and informal for training managers. 

“There’s leadership training, but then there’s also opportunities to have dialogue with managers, opportunities like bringing in speakers that we do on an enterprise-wide basis that helps folks to understand how do you make sure that you’re actively managing your team in the best way possible,” she says. 

But Timberlake D’Adamo adds that “the best way possible” is necessarily a subjective assessment. 

“One manager might feel they have certain things that they want to see or expect; and then another manager maybe has different expectations,” she says. 

“A function of bringing all that together into the organisation [is] how do we allow managers to operate independently, as they do with their teams, but then also set some clear norms.” 

Timberlake D’Adamo says the benefits to CalPERS as an organisation, or to any organisation, from equipping senior staff and managers to understand and integrate diversity, equity and inclusion into how they manage teams is clear. 

“The team is more engaged, I think that there’s better communication, there is an opportunity for the team to really thrive,” she says. 

Timberlake D’Adamo says that a clear and committed DEI focus helps the organisation support employees, who at the end of the day “want to have value, they want to have input, they want to be heard”. 

“If there’s one thing that I’ve realised, it is the extent to which people really want to be heard – the need, actually, the drive to be heard,” she says. 

“The benefits of getting it close to right or right, if you’re able to do that, is just that: creating a team [ where] people really feel valued, they feel respected.  

“And again, those are the things that people should feel. When you’re on a team, and you’re really contributing, it creates an opportunity for that to be felt. That that helps the organization. It definitely helps the organisation.” 

Recognition of DEI issues not only helps an organisation make the most of the teams it already has, but it’s also a critical tool in improving the strike rate of new hires. Timberlake D’Adamo says all organisations are looking for ways to make better decisions on who to bring in, to reduce the complexity, cost, and hassle of turnover from not hiring the most suitable people in the first place. 

“What everybody is trying to do in their own way is trying to get some insight and some intel so that they can make a decision, a hiring decision…they’re not going to regret at end of the day,” she says. 

“Everybody’s trying to figure out how do we make the most out of the opportunities that we have in terms of creating a team. [If] there’s 10 slots, how are we going to pick the 10 best people that fit into this? What is the matrix? What is the combination that we’re going to build that is going to get us that result?  

“Turnover, as we all know, costs a lot of money – not just money, but think of time and think of historical knowledge. It is 100 per cent one of the most important decisions that organisations make.” 

Politicisation at US public pension funds has taken a turn for the worse after a new law threatens to put politicians in charge of the Public Employees’ Retirement System of Mississippi (Mississippi PERS) the $30 billion pension fund for state employees, by sweeping away the existing board.

The new law would replace the 11-member trustee board, primarily made up of PERS members and retirees, with political appointments whereby PERS members and retirees on the board would drop from eight to two, and political appointees jump from two to seven. Currently, the only two political appointees are the state treasurer and one member appointed by the governor.

Unlike at some other US pension funds, this time the nub of the issue isn’t ESG. The main reason politicians in Mississippi want to get involved in governance at the pension fund is “insinuations of mismanagement.”

Their particular beef is the decision to increase employer contributions to try and shore up PERS’ under-funded status. As well as removing the existing board, the proposed House Bill 1590, now awaiting Senate approval, seeks to revoke a board decision passed last August to increase employer contributions.

Employer contributions are set to rise by 5 per cent over a three year period, beginning this July with a 2 per cent increase. The goal – to try and resolve PERS’ long-term funding ratio of 56 per cent.

Pension fund CIOs insist funding and investment strategy must go hand in hand. They say even with healthy returns, it’s impossible to invest their way out of poor funding policies and larger contributions from employers are essential to close the gap between pension funds’ liabilities and assets, especially given the decline in active members compared to retirees.

“The board has always acted in accordance with their statutory and fiduciary duty, and PERS will continue to serve its membership to the best of its ability,” PERS executive director Ray Higgins told Top1000funds.com. “Regarding the scheduled rate increase, appropriate funding in some manner is very important for the long-term needs of the plan. We all want to be a part of the solution.”

In a statement, PERS’ trustees argue that the new law would prevent essential funding, as recommended by the actuary. “As fiduciaries, we believe this is unacceptable,” they write.

“By rejecting the board’s proposed rate increase, this approach not only would jeopardize the membership, it would also hurt all taxpayers. The longer the plan goes without proper funding, the more it costs and the harder it gets, leaving future citizens with the liability.”

The current system works

The trustees argue that the current board structure has been in place for many years and the system has proven resilient, continuing to pay benefits through times of adversity like the GFC and pandemic. Moreover, they argue any change in leadership should be done openly and transparently.

They say PERS has a history of good returns, and low fees. One-, three-, five- and 10-year annualised returns are 7.76 per cent, 9.36 per cent, 7.63 per cent and 8.47 per cent respectively. Last fiscal year, investment manager fees were only $0.31 for every $100 under management –  less than 75 per cent of PERS’ peer group.

The trustees argue that any change in governance would indirectly shift more power to politicians, in effect turning control over to the governor and lieutenant governor, especially since all appointments would be with advice and consent of the senate.

“This change has the appearance of an attempt to politicise the PERS board. Removing most of the current board members results in the loss of institutional knowledge and continuity,” they argue.

In August last year PERS lowered its assumed rate of return from 7.55 per cent to 7 per cent assuming that its investments (its primary source of revenue) will grow at a lower rate.

Governance and pension fund design expert Keith Ambachtsheer has flagged governance issues at US pension funds for years, arguing there are a few US states that have people who understand the principles around arms length governance, but that they are in a minority. 

“The fundamental problem is a structural one. If PERS is not operationally arms-length from the Mississippi government, it turns the PERS board into a politically-motivated organization and mixing politics and pensions tends to produce winners and losers rather than ‘value for money,” he says.

While developed markets’ aging population problem becomes increasingly pronounced, Asian countries are witnessing a rapid rise of youth with some sub-regions’ median age staying firmly under 30. Global strategy advisor and economist Parag Khanna said Asians’ movements around the world and their increasingly deep intra-region relationships will have massive geopolitical and workforce impacts on global markets. 

 While developed markets’ aging population problem becomes increasingly pronounced, South Asian and ASEAN countries are witnessing a rapid rise of youth with the regions’ median age staying firmly under 30.  

There will eventually be “more Asian youth than any other category of human being” according to global strategy advisor and economist Parag Khanna speaking at the Fiduciary Investors Symposium, and their movements around the world will have massive political and workforce impacts on global markets.  

“When people ask this big, weighty question of what the future of humanity is, you’ll hear lots of philosophical answers. People will say things like religious wars or capitalism, which are lofty kinds of ideas,” he told the symposium in Singapore.  

“I think the factual answer to the question is literally two words: Asian youth.” 

While the world is used to the Chinese diaspora being the largest community numerically, Khanna said that will cease to be the case “imminently” as more Chinese retreat to Asia, not to mention the country’s median age (40) is older than the rest of region.  

Instead, South Asians (with youth giants like India, Pakistan and Bangladesh) will play a bigger part in the global markets from this point on, especially in regions like the US, Canada and Europe where they already occupy a greater share of the workforce than the Chinese. This is thanks to various outbound motivation drivers like pollution, economics and corruption. 

Apart from demographic advantages, Asia also has economic perks such as low currency volatility. The Gulf countries have long pegged their currencies to USD to underpin continued currency stability, and long-term low interest rates across Asia’s major economies have enabled steady credit availability and flows.  

Asia also accounts for most of the emerging market equity growth. Khanna said longer-term factors including capital account liberalisation and accelerated privatisation will unlock new investment inflows into fresh Asian listings. 

“[Emerging markets] is a term I hate, and I only use it in quotes,” Khanna said. “Because you throw a bunch of countries together as if there’s any kind of correlation between what’s happening in Brazil, Nigeria, or South Africa today versus the [Asian] region.” 

“Think regionally, think geographically, and that’s going to serve you a whole lot better.” 

Asianisation

Khanna said many people have considered the rise of China as the megatrend of the century. However, it was only a part of a broader “Asianisation” trend, marked by the resurrection of the Asian system and deepening relationships between states and subregions.  

“The further we look into the future and look back from that future, the more apparent it is that Asia has multiple drivers, multiple anchors and multiple pillars. The overall systemic quality that they are building or rebuilding – that is the great story of the 21st century,” he said.  

This also provides an alternative perspective to ongoing geopolitical tensions such as the Russo-Ukrainian War. Even since the seizure of Crimea in 2014, the increasing Western sanction has persuaded Russia to pivot towards being more of a North Asian country, rather than Eastern European, Khanna said. 

Russia has huge leverage as Asia’s “gas station and grocery store”, he said. 

“What you’ve noticed in the past two years is that India has embraced Russia, and countries have been trying to find exemptions to the oil cap. So how can you possibly presume that Russia is isolated and is destined to collapse?  

“Whether you want it to or not is your own personal point of view… but the world’s largest country has 14 neighbors, many of them Asian, and the Asians view it as a very vital provider of energy, commodities, food, access to the Arctic. 

“So Russia, again for better or worse, is not going anywhere.”